UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from___________to___________

Commission file number: 000-55623

RICH UNCLES REAL ESTATE INVESTMENT TRUST I

(Exact name of registrant as specified in its charter)



California	37-6511147
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3090 Bristol Street, Suite 550, Costa Mesa, CA	92626
(Address of principal executive offices)	(Zip Code)

(855) 742-4862

(Registrant’s telephone number, including area code:)

Securities registered pursuant to Section 12(b) of the Act.



Title of each class	Trading symbols(s)	Name of each exchange on which registered
N/A	N/A	N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	Smaller reporting company x
	Emerging growth company ¨

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO ý

As of October 31, 2019, there were 8,344,729 shares of common stock outstanding.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

FORM 10-Q

SEPTEMBER 30, 2019

INDEX



PART I -	FINANCIAL INFORMATION		5

	Item 1.	Financial Statements (Unaudited)	5

		Condensed Consolidated Balance Sheets – September 30, 2019 and December 31, 2018	5

		Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2019 and 2018	6

		Condensed Consolidated Statements of Shareholders’ Equity – Three Months Ended September 30, 2019 and 2018	7

		Condensed Consolidated Statements of Shareholders’ Equity – Nine Months Ended September 30, 2019 and 2018	8

		Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2019 and 2018	9

		Notes to Condensed Consolidated Financial Statements	10

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

	Item 4.	Controls and Procedures	38

PART II -	OTHER INFORMATION		38

	Item 1.	Legal Proceedings	38

	Item 1A.	Risk Factors	38

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

	Item 3.	Defaults upon Senior Securities	39

	Item 6.	Exhibits	39

SIGNATURES			41

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbor provisions created thereby. For this purpose, any statements made in this Quarterly Report on Form 10-Q that are not historical or current facts may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "anticipates," "believes," "seeks," "estimates," "expects," "intends," "continue," "can," "may," "plans," "potential," "projects," "should," "could," "will," "would" or similar expressions and the negatives of those expressions are intended to identify forward-looking statements.

The forward-looking statements included herein represent our management’s current expectations and assumptions based on information available as of the date of this report. These statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time-to-time with the Securities and Exchange Commission (the "SEC"). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information, which speak only as of the date of this report. Therefore, such statements are not intended to be a guarantee of our performance in future periods.

Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time-to-time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual future results to be materially different from those expressed or implied by any forward-looking statements. The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from our forward-looking statements:


•	The pending merger transaction described in Note 1 to the condensed consolidated financial statements is subject to significant conditions precedent and the merger might not be completed.


•	We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties and we may be unable to acquire, dispose of, or lease properties on a timely basis or on attractive terms.


•	We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.


•	Disruptions in the financial markets and uncertain economic conditions affecting us, the geographies or industries in which our properties are concentrated, or our tenants may adversely affect our business, financial condition and results of operations.


•	Our properties, intangible assets and other assets may be subject to impairment charges.


•	We could be subject to unexpected costs or unexpected liabilities that may arise from potential dispositions of properties and may be unable to dispose such properties on advantageous terms.


•	We could be subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally.


•	We have substantial indebtedness, which may affect our ability to pay dividends, and expose us to interest rate fluctuation risk and the risk of default under our debt obligations.


•	We may be affected by risk related to the incurrence of additional secured or unsecured debt.


•	We have only a limited prior operating history, and the prior performance of real estate investment programs sponsored by affiliates of our advisor and sponsor, BrixInvest, may not be an indication of our future results.


•	We may not be able to attain or maintain profitability.


•	Cash for dividend distributions to investors will be from net rental income (including sales of properties) or waiver or deferral of reimbursements or fees paid to BrixInvest, our advisor and sponsor.


•	We may not generate cash flows sufficient to pay our dividends to shareholders or meet our debt service obligations.


•	We may be affected by risks resulting from losses in excess of insured limits.


•	We may fail to qualify as a REIT for U.S. federal income tax purposes.


•	Our business, financial condition and results of operations may be adversely affected by an ongoing investigation by the SEC.


•	We are dependent upon our advisor which has the right to terminate the advisory agreement upon 60 days’ written notice without cause or penalty.


•	Our advisor and its affiliates, including all of our executive officers and our affiliated trust managers and other key real estate professionals, face conflicts of interest, which may result in actions that are not in the long-term best interests of our shareholders.


•	A significant portion of our business operations are conducted over the Internet, putting us at risk from cybersecurity attacks, including attempts to gain unauthorized access to our confidential data, viruses, ransomware, and other electronic security breaches. Such cyber-attacks can range from individual attempts to gain unauthorized access to our information

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technology systems to more sophisticated security threats that could impact day-to-day operations. While we employ a number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful at preventing a cyber-attack. Cybersecurity incidents could compromise confidential information of our investors, tenants, employees, and vendors and cause system failures and disruptions of operations.

Our forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in light of the risk factors identified above and the additional risks and uncertainties described in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q, in the "Risk Factors" section of the Joint Proxy Statement included in our Schedule 14A filed with the SEC on October 22, 2019 and filed as Exhibit 2.1 to this Quarterly Report on Form 10-Q, and Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2018.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. We qualify all of our forward-looking statements by these cautionary statements.

All references to "Notes" throughout this report refer to footnotes to the condensed consolidated financial statements of the registrant in Part I. Item 1 - Financial Statements (Unaudited).

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PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Condensed Consolidated Balance Sheets

(Unaudited)



	September 30, 2019			December 31, 2018
Assets
Real estate property investments:
Land	$	29,247,323		$	29,691,680
Buildings and improvements	96,209,944			97,752,787
Tenant origination and absorption costs	12,033,433			12,701,634
Total investments in real estate property	137,490,700			140,146,101
Accumulated depreciation and amortization	(18,282,945		)	(15,070,564		)
Total investments in real estate property, net	119,207,755			125,075,537
Cash and cash equivalents	2,795,626			2,914,005
Restricted cash	92,684			462,140
Tenant receivables	1,794,809			1,707,835
Above-market lease intangibles, net	755,372			781,862
Interest rate swap derivative assets	31,420			404,267
Other assets	46,917			176,511
Total assets	$	124,724,583		$	131,522,157

Liabilities and Shareholders’ Equity
Mortgage notes payable, net	$	61,840,703		$	61,446,068
Accounts payable, accrued and other liabilities	2,258,560			1,419,222
Sales deposit liability (Note 5)	—			1,000,000
Share repurchases payable	—			880,404
Below-market lease intangibles, net	2,460,720			3,105,843
Due to affiliates (Note 9)	—			59,992
Interest rate swap derivative liabilities	65,857			—
Total liabilities	66,625,840			67,911,529

Commitments and contingencies (Note 10)

Redeemable common stock	—			163,572

Shareholders' Equity
Common stock, par value $0.01 per share, 10,000,000 shares authorized, 8,344,729 and 8,390,776 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	83,447			83,908
Additional paid-in-capital	83,441,189			82,890,895
Cumulative distributions and net losses	(25,425,893		)	(19,527,747		)
Total shareholders’ equity	58,098,743			63,447,056
Total liabilities and shareholders’ equity	$	124,724,583		$	131,522,157

See accompanying notes to condensed consolidated financial statements.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Rental income	$	3,302,347		$	3,293,384	$	9,868,701		$	9,889,765

Expenses:
Fees to affiliates (Note 9)	287,562			271,263		886,786			856,743
General and administrative	851,721			230,299		1,452,538			760,559
Depreciation and amortization	1,450,227			1,424,669		4,336,641			4,282,006
Interest expense (Notes 7 and 8)	828,987			714,138		2,674,383			1,830,849
Property expenses	607,706			631,985		1,811,557			1,903,165
Impairment of real estate investment property (Note 6)	—			—		—			862,190
Total expenses	4,026,203			3,272,354		11,161,905			10,495,512

Other income:
Gain on disposal of real estate investment (Note 6)	—			—		113,773			—

Net (loss) income	$	(723,856	)	$	21,030	$	(1,179,431	)	$	(605,747	)

Net (loss) income per share, basic and diluted	$	(0.09	)	$	0.00	$	(0.14	)	$	(0.07	)

Weighted-average number of common shares outstanding, basic and diluted	8,342,328			8,389,726		8,369,004			8,403,649

Dividends declared per common share	$	0.1875		$	0.1875	$	0.5625		$	0.5625

See accompanying notes to condensed consolidated financial statements.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Condensed Consolidated Statements of Shareholders' Equity

Three Months Ended September 30, 2019 and 2018

(Unaudited)



	Common Stock					Additional Paid-in- Capital			Cumulative Distributions and Net Losses			Total Shareholders' Equity
	Shares		Amounts			Additional Paid-in- Capital			Cumulative Distributions and Net Losses			Total Shareholders' Equity
Balance, June 30, 2019	8,337,161		$	83,372		$	83,361,265		$	(23,138,816	)	$	60,305,821
Stock compensation expense	7,568		75			79,924			—			79,999
Dividends declared	—		—			—			(1,563,221		)	(1,563,221		)
Net loss	—		—			—			(723,856		)	(723,856		)
Balance, September 30, 2019	8,344,729		$	83,447		$	83,441,189		$	(25,425,893	)	$	58,098,743

	Common Stock					Additional Paid-in-Capital			Cumulative Distributions and Net Losses			Total Shareholders' Equity
	Shares		Amounts			Additional Paid-in-Capital			Cumulative Distributions and Net Losses			Total Shareholders' Equity
Balance, June 30, 2018	8,395,239		$	83,952		$	82,519,638		$	(16,116,116	)	$	66,487,474
Issuance of common stock	99,585		996			1,060,583			—			1,061,579
Stock compensation expense	4,800		48			51,120			—			51,168
Reclassifications from redeemable common stock	—		—			449,298			—			449,298
Repurchase of common stock	(131,935	)	(1,319		)	(1,405,101		)	—			(1,406,420		)
Dividends declared	—		—			—			(1,573,763		)	(1,573,763		)
Net income	—		—			—			21,030			21,030
Balance, September 30, 2018	8,367,689		$	83,677		$	82,675,538		$	(17,668,849	)	$	65,090,366

See accompanying notes to condensed consolidated financial statements.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Condensed Consolidated Statements of Shareholders' Equity

Nine Months Ended September 30, 2019 and 2018

(Unaudited)



	Common Stock					Additional Paid-in- Capital			Cumulative Distributions and Net Losses			Total Shareholders' Equity
	Shares		Amounts			Additional Paid-in- Capital			Cumulative Distributions and Net Losses			Total Shareholders' Equity
Balance, December 31, 2018	8,390,776		$	83,908		$	82,890,895		$	(19,527,747	)	$	63,447,056
Issuance of common stock	99,097		991			1,046,469			—			1,047,460
Stock compensation expense	14,900		148			157,352			—			157,500
Reclassifications from redeemable common stock	—		—			1,043,976			—			1,043,976
Repurchase of common stock	(160,044	)	(1,600		)	(1,697,503		)	—			(1,699,103		)
Dividends declared	—		—			—			(4,718,715		)	(4,718,715		)
Net loss	—		—			—			(1,179,431		)	(1,179,431		)
Balance, September 30, 2019	8,344,729		$	83,447		$	83,441,189		$	(25,425,893	)	$	58,098,743

	Common Stock					Additional Paid-in-Capital			Cumulative Distributions and Net Losses			Total Shareholders' Equity
	Shares		Amounts			Additional Paid-in-Capital			Cumulative Distributions and Net Losses			Total Shareholders' Equity
Balance, December 31, 2017	8,358,254		$	83,583		$	82,350,273		$	(12,347,486	)	$	70,086,370
Issuance of common stock	299,568		2,995			3,187,209			—			3,190,204
Stock compensation expense	12,900		129			137,385			—			137,514
Reclassifications from redeemable common stock	—		—			187,572			—			187,572
Repurchase of common stock	(303,033	)	(3,030		)	(3,186,901		)	—			(3,189,931		)
Dividends declared	—		—			—			(4,715,616		)	(4,715,616		)
Net loss	—		—			—			(605,747		)	(605,747		)
Balance, September 30, 2018	8,367,689		$	83,677		$	82,675,538		$	(17,668,849	)	$	65,090,366

See accompanying notes to condensed consolidated financial statements.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended
	September 30, 2019			September 30, 2018
Cash Flows from Operating Activities:
Net loss	$	(1,179,431	)	$	(605,747	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	4,336,641			4,282,006
Provision for doubtful accounts	—			64,944
Stock compensation expense	157,500			137,514
Amortization of deferred rents	(108,918		)	(257,731		)
Amortization of deferred financing costs	305,022			259,344
Amortization of above-market leases	26,490			26,490
Amortization of below-market leases	(645,123		)	(645,123		)
Impairment of real estate investment, net	—			862,190
Gain on disposal of real estate investment	(113,773		)	—
Unrealized loss (gain) on interest rate swap valuation	438,704			(357,520		)
Changes in operating assets and liabilities:
Decrease (increase) in tenant receivables	12,884			(61,808		)
Decrease (increase) in other assets	129,594			(93,604		)
Increase in accounts payable, accrued and other liabilities	946,057			281,114
(Decrease) increase in due to affiliates	(59,992		)	44,434
Net cash provided by operating activities	4,245,655			3,936,503

Cash Flows from Investing Activities:
Additions to existing real estate investments	(310,644		)	(423,631		)
Repayment of refundable sales deposit	(1,000,000		)	—
Net cash used in investing activities	(1,310,644		)	(423,631		)

Cash Flows from Financing Activities:
Proceeds from mortgage note payable	3,000,000			—
Repayments of mortgage notes payable	(927,624		)	(901,298		)
Payment of deferred financing costs to third parties	(94,864		)	—
Payments of deferred financing costs to affiliates	(30,000		)	—
Refundable loan deposit	—			(10,000		)
Payment of offering costs to affiliates	—			(95,612		)
Repurchase of common stock	(1,699,103		)	(3,189,931		)
Dividends paid to common shareholders	(3,671,255		)	(1,525,412		)
Net cash used in financing activities	(3,422,846		)	(5,722,253		)
Net decrease in cash, cash equivalents and restricted cash	(487,835		)	(2,209,381		)
Cash, cash equivalents and restricted cash, beginning of period	3,376,145			6,027,807
Cash, cash equivalents and restricted cash, end of period	$	2,888,310		$	3,818,426

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	2,123,202		$	1,870,216

Supplemental Schedule of Noncash Investing and Financing Activities:
Reclassifications from redeemable common stock	$	1,043,976		$	187,572
(Decrease) increase in share redemptions payable	$	(880,404	)	$	244,902
Reinvested dividends from common shareholders	$	1,047,460		$	3,190,204

See accompanying notes to condensed consolidated financial statements.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. BUSINESS AND ORGANIZATION

Rich Uncles Real Estate Investment Trust I (the "Company") was formed on March 7, 2012. The Company is an unincorporated real estate investment trust ("REIT") under the laws of the State of California. The Company elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with the year ended December 31, 2014.

The Company was formed primarily to invest in single-tenant income-producing properties located in California and that are leased to creditworthy tenants under long-term net leases, however, the Company may invest up to 20% of the net proceeds of its offering in properties located outside of California. The Company’s goal is to generate current income for investors and long-term capital appreciation in the value of its properties.

The Company holds its investments directly and/or through special purpose wholly-owned limited liability companies or other subsidiaries. As of December 31, 2018, the Company held a 70.14% interest in one property subject to a tenancy-in-common agreement. On May 9, 2019, the Company purchased the remaining 29.86% interest in this property, resulting in full 100% ownership as further described in Note 5.

The Company is externally managed by its advisor and sponsor, BrixInvest, LLC (f/k/a Rich Uncles, LLC) ("BrixInvest" or the "Advisor") whose members include Aaron S. Halfacre, the Company’s Chief Executive Officer and President, and Ray Wirta, the Company's Chairman of the Board of Trust Managers (the "Board"). The Advisor is a Delaware limited liability company registered to do business in California. The Company has entered into an agreement (the "Advisory Agreement") with the Advisor.

The current term of the Advisory Agreement is scheduled to expire on May 10, 2020. The Advisory Agreement may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the Company and the Advisor. The Advisory Agreement is terminable by a majority of the Company’s independent trust managers or the Advisor on 60 days’ written notice with or without cause. Upon termination of the Advisory Agreement, the Advisor may be entitled to a termination fee. The Advisor also serves, directly or through an affiliate, as the advisor and sponsor for affiliated companies RW Holdings NNN REIT, Inc. ("NNN REIT") and BRIX REIT, Inc.

On January 11, 2019, the Company’s Board approved and established an estimated net asset value ("NAV") per share of the Company’s common stock of $10.57 (unaudited). Effective January 14, 2019, the purchase price per share of the Company’s common stock in the Company’s dividend reinvestment plan and share repurchase plan changed from $10.66 (unaudited) to $10.57 (unaudited).

Pending Merger Transaction

The following information summarizes certain of the more detailed information that appears in the Joint Proxy Statement and Prospectus dated October 22, 2019 (the “Joint Proxy Statement”) filed by the Company with the SEC on Schedule 14A on October 22, 2019 and as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

In January 2019, the Company announced that it had commenced a review of strategic alternatives to include the marketing of its entire 20-property real estate portfolio for disposition by sale, merger or other transaction structure, subject to the approval of its shareholders. Numerous potential acquirors participated in a public multi-round bidding process directed by Cushman & Wakefield. The bidding process resulted in a short list of bidders submitting acquisition bids to a special committee of the Company's independent trust managers (the "Special Committee"), for review, which bidders included RW Holdings NNN REIT, Inc. ("NNN REIT") an affiliated real estate investment trust that is sponsored by the Company's Advisor. Following a review of all bids, the Special Committee commenced an exclusive due diligence process with NNN REIT in order to determine whether a potential transaction might result. NNN REIT currently owns 25 single tenant operating retail, office and industrial assets, one parcel of land, a 72.7% interest in an operating office asset and approximately 4.8% of the Company's shares.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

On September 20, 2019 the Company announced that it had entered into an agreement and plan of merger (the "Merger Agreement") pursuant to which a business combination would be effected by its merger with a subsidiary of NNN REIT (the "Merger") and the Company's existence would cease. The Merger is subject to certain closing conditions, including the approval of the Merger by both the Company's shareholders and NNN REIT’s stockholders, as discussed below. The Merger is expected to close as soon as practicable following the Company's special meeting of shareholders, which is scheduled to be held on December 17, 2019 (the "Special Meeting") and the satisfaction of the closing conditions. The combined company following the Merger will retain the name “RW Holdings NNN REIT, Inc.” The Merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each of the Company's common shares (the “REIT I Common Shares”) issued and outstanding immediately prior to the effective time of the Merger (other than REIT I Common Shares owned by NNN REIT or any wholly-owned subsidiary of NNN REIT) will be automatically canceled and retired, and converted into the right to receive one share of Class C common stock of NNN REIT (the “Class C Common Stock”), with any fractional REIT I Common Shares converted into a corresponding number of fractional shares of Class C Common Stock.

On October 22, 2019, the Company filed the Joint Proxy Statement on Schedule 14A with the U.S. Securities and Exchange Commission (the “SEC”) with NNN REIT relating to the Company's special meeting of shareholders to be held to vote on the Merger and a related amendment to the Company's Declaration of Trust (the "Amendment"). Shareholders of record on October 21, 2019 are eligible to vote on the proposal to approve the Merger and the Amendment.

The Company suspended the redemptions of common stock under its share repurchase program in January 2019 and suspended its dividend reinvestment plan in April 2019. Redemptions through December 15, 2018 were paid in January 2019 and redemptions through the January 2019 suspension were paid in April 2019. All subsequent dividend payments have been or will be paid in cash. The suspension of the dividend reinvestment plan will remain in place until such time that a determination can be made by the Board pertaining to the ultimate resolution of the pending Merger.

If the Merger is approved, the amount of future distributions, and the declaration and payment thereof, and whether or not to reinstate the dividend reinvestment plan will be determined by the board of directors of the post-Merger company (the "Combined Company" after consideration of the Combined Company’s financial condition and such other factors as the board of directors of the Combined Company deems relevant.

During the pendency of the Special Meeting, and thereafter if the Merger is not approved, the Company’s operating performance and the timing and amount of future distributions is subject to risks and uncertainties as described under “Risk Factors” Part II, Item 1A below, in the Joint Proxy Statement and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial statements and the rules and regulations of the SEC. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Such unaudited condensed consolidated financial statements and accompanying notes are the representations of the Company’s management, which is responsible for their integrity and objectivity. These unaudited condensed consolidated financial statements should be read in conjunction with the December 31, 2018 audited consolidated financial statements included in the Company’s Form 10-K filed with the SEC on March 27, 2019.

The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which are normal and recurring, necessary to fairly state its financial position, results of operations and cash flows. All significant intercompany balances and transactions are eliminated in consolidation. The December 31, 2018 condensed consolidated balance sheet included herein was derived from the audited consolidated financial statements but does not include all disclosures or notes required by GAAP for complete financial statements.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Use of Estimates

The preparation of the condensed consolidated financial statements and accompanying notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Fair Value Disclosures

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an existing price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows:

Level 1: quoted prices in active markets for identical assets or liabilities;

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models, and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instrument for which it is practicable to estimate the fair value:

Cash and cash equivalents, restricted cash, tenant receivables, other assets, accounts payable, accrued and other liabilities, sales deposit liability, share repurchase payable and due to affiliates: These balances approximate their fair values due to the short nature of these items.

Derivative Instruments: The Company’s derivative instruments are presented at fair value in the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.

Mortgage Notes Payable: The fair value of the Company’s mortgage notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.

Restricted Cash

Restricted cash is comprised of funds which are restricted for tenant improvements and property tax impounds.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Other Comprehensive Income (Loss)

For all periods presented, other comprehensive income (loss) is the same as net income (loss).

Reclassifications

Certain prior period revenue account balances in the unaudited condensed consolidated statement of operations have been reclassified to conform with the current period presentation. The reclassifications had no impact on net income.

Per Share Data

Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share of common stock equals basic earnings (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three and nine months ended September 30, 2019 and 2018.

Impairment of Investment in Real Estate Property

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. If, based on the analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset.

The following are the Company’s updated significant accounting policies that have been affected by the adoption of Topic 842 as discussed below in New Accounting Standards Issued and Adopted:

Revenue Recognition

The Company recognizes rental income, tenant reimbursements and other lease-related revenue when all of the following criteria are met: (i) the agreement has been fully executed and delivered, (ii) services have been rendered, (iii) the amount is fixed or determinable and (iv) payment has been received or the collectability of the amount due is probable. Lease termination fees are amortized over the remaining lease term, if applicable. If there is no remaining lease term, they are recognized when received and realized. Minimum annual rental revenues are recognized in rental income on a straight-line basis over the non-cancellable term of the related lease.

The recognition of rental income commences when the tenant takes possession or controls the physical use of the leased property. In order for the tenant to take possession, the leased property must be substantially complete and ready for its intended use. In order to determine whether the leased property is substantially complete and ready for its intended use, the Company begins by determining whether the Company or the tenant owns the tenant improvements, if the lease agreement provides for tenant improvements.

Tenant improvement ownership is determined based on various factors including, but not limited to:


•	whether the lease stipulates how a tenant improvement allowance may be spent;


•	whether the amount of a tenant improvement allowance is in excess of market rates;


•	whether the tenant or landlord retains legal title to the improvements at the end of the lease term;


•	whether the tenant improvements are unique to the tenant or general-purpose in nature; and


•	whether the tenant improvements are expected to have any residual value at the end of the lease.

When the Company concludes that it is the owner of tenant improvements, rental income recognition begins when the tenant takes possession of the completed property, which is generally when Company-owned tenant improvements are substantially complete. In addition, when the Company concludes that it is the owner of tenant improvements, the Company records the costs to construct the tenant improvements, including costs paid for or reimbursed by the tenants, as a capital asset. For these tenant improvements, the Company records the amount funded by or reimbursed by the tenants as deferred revenue, which is amortized on a straight-line basis as additional rental income over the term of the related lease.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

When the Company concludes that the tenant is the owner of tenant improvements, rental income recognition begins when the tenant takes possession or controls the physical use of the leased property. Any tenant improvement allowance (including amounts that the tenant can take in the form of cash or a credit against its rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. In addition, when the Company concludes that the tenant is the owner of tenant improvements for accounting purposes, the Company records its contribution towards such improvements as a lease incentive, which is included in deferred leasing costs and acquisition-related intangible assets, net in the unaudited condensed consolidated balance sheets and amortized as a reduction to rental income on a straight-line basis over the term of the related lease.

Tenant Reimbursements

Tenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income in the period the recoverable costs are incurred. Tenant reimbursements are recorded on a gross basis when the Company pays the associated costs directly to third-party vendors and is reimbursed subsequently by the tenants.

Allowances for Tenant and Deferred Rent Receivables

The Company carries its tenant and deferred rent receivables net of allowances for amounts that may not be collected. Prior to the Company’s adoption of Topic 842 on January 1, 2019, the allowances are increased or decreased through provision for bad debts in the Company’s unaudited condensed consolidated statement of operations. Upon the adoption of Topic 842 on January 1, 2019, the determination of the adequacy of the Company's allowances for tenant and deferred rent receivables includes a binary assessment of whether the amounts due under a tenant’s lease agreement are probable of collection.

For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any current and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.

For tenant and deferred rent receivables deemed probable of collection, the Company may also record an allowance under other authoritative GAAP depending upon the Company’s evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in the Company’s consolidated statements of operations. Based on the Company’s evaluation as of September 30, 2019 and December 31, 2018, the Company determined that its tenant and deferred rent receivables are probable of collection.

Recent Accounting Pronouncements

New Accounting Standards Issued and Adopted

Effective January 1, 2019, the Company adopted Financial Accounting Standards Board ("FASB") ASU No. 2016-02 "Leases (Topic 842)" and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01, which provide practical expedients, technical corrections and improvements for certain aspects of ASU 2016-02, on a modified retrospective basis (collectively "Topic 842"). Topic 842 establishes a single comprehensive model for entities to use in accounting for leases and supersedes the existing leasing guidance. Topic 842 applies to all entities that enter into leases. Lessees are required to report assets and liabilities that arise from leases. Lessor accounting has largely remained unchanged; however, certain refinements were made to conform with revenue recognition guidance, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. The Company currently does not have any exposure to Topic 842 from the perspective of a lessee as the operating lease is borne by the Sponsor. The Company's exposure to Topic 842 is primarily as a lessor. The Company has elected to apply the applicable practical expedients provided by Topic 842.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Lessor Accounting

As a lessor, the Company’s leases with tenants generally provide for the lease of real estate properties, as well as common area maintenance, property taxes and other recoverable costs. Under Topic 842, the lease of space is considered a lease component while the common area maintenance, property taxes and other recoverable costs billings are considered nonlease components, which fall under revenue recognition guidance in Topic 606. However, upon adopting the guidance in Topic 842, the Company determined that its tenant leases met the criteria to apply the practical expedient provided by ASU 2018-11 to recognize the lease and non-lease components together as one single component. This conclusion was based on the consideration that 1) the timing and pattern of transfer of the nonlease components and associated lease component are the same, and 2) the lease component, if accounted for separately, would be classified as an operating lease. As the lease of properties is the predominant component of the Company’s leasing arrangements, the Company accounted for all lease and nonlease components as one-single component under Topic 842. As a result, the adoption of Topic 842 did not have any impact on the Company’s timing or pattern of recognition of rental revenues as compared to previous guidance. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU 2018-11 have been combined under rental income subsequent to the adoption of Topic 842 for the three and nine months ended September 30, 2019 in the Company’s unaudited condensed consolidated statements of operations. The Company also made conforming reclassifications for the prior year’s tenant reimbursements. For the three month periods ended September 30, 2019 and 2018, tenant reimbursements included in rental income amounted to $568,745 and $552,276, respectively, and for the nine month periods ended September 30, 2019 and 2018, tenant reimbursements included in rental income amounted to $1,669,100 and $1,667,132, respectively.

Prior to the adoption of Topic 842, lessor costs for certain services directly reimbursed by tenants have already been presented by the Company on a gross basis in revenues and expenses.

Leasing Costs

Upon adoption of Topic 842, the Company elected to apply the package of practical expedients provided and did not reassess the following as of January 1, 2019: 1) whether any expired or existing contracts are leases or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Under Topic 842, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, beginning January 1, 2019, the Company will no longer capitalize internal leasing costs and third-party legal leasing costs and will instead expense these costs as incurred. These expenses will be included in legal leasing costs under general and administrative expenses in the unaudited condensed consolidated statements of operations. During the three and nine months ended September 30, 2019, the Company did not incur any indirect leasing costs which would have been capitalized prior to the adoption of Topic 842. The election of the package of practical expedients described above permits us to continue to account for our leases that commenced before January 1, 2019 under the previously existing lease accounting guidance for the remainder of their lease terms, and to apply the new lease accounting guidance to leases commencing or modified after January 1, 2019.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Allowances for Tenant and Deferred Rent Receivables

Upon the adoption of Topic 842 on January 1, 2019, the Company’s determination of the adequacy of its allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. In addition, for tenant and deferred rent receivables deemed probable of collection the Company also may record an allowance under other authoritative GAAP depending upon the Company’s evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in the Company’s unaudited condensed consolidated statements of operations.

New Accounting Standards Recently Issued and Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework -Changes to the Disclosure Requirements for Fair Value Measurement ("ASU No. 2018-13"). ASU No. 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and to disclose the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop the Level 3 fair value measurement. In addition, public entities are required to provide information about the measurement uncertainty of recurring Level 3 fair value measurements from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date. ASU 2016-02 is effective for the Company beginning January 1, 2020. Entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is still evaluating the impact of adopting ASU No. 2018-13 on its consolidated financial statements.

NOTE 3. CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS

Tenant Receivables

Tenant receivables, net consisted of the following:



	September 30, 2019		December 31, 2018
Straight-line rent	$	1,499,134	$	1,399,276
Tenant rent	92,050		200,301
Unbilled tenant reimbursements	203,625		108,258
Total	$	1,794,809	$	1,707,835

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Accounts Payable, Accrued and Other Liabilities

Accounts payable, accrued and other liabilities were comprised of the following:



	September 30, 2019		December 31, 2018
Accounts payable	$	45,611	$	52,057
Accrued expenses (a)	1,237,146		184,441
Accrued interest payable	223,238		288,437
Unearned rent	482,459		624,181
Tenant security deposits	270,106		270,106
Total	$	2,258,560	$	1,419,222

(a) Accrued expenses as of September 30, 2019 include $674,832 for Merger expenses, including $500,000 paid to SunTrust Robinson Humphrey, Inc. (SunTrust") in October 2019 for the fairness opinion that they provided to the Special Committee in September 2019, along with SunTrust's legal fees and other expenses, plus legal fees for the Special Committee's legal counsel.

NOTE 4. REAL ESTATE PROPERTY INVESTMENTS

The following table provides summary information regarding the Company’s 20 real estate investments as of September 30, 2019:



Property	Location	Acquisition Date	Property Type	Land, Building and Improvements		Tenant Origination and Absorption Costs		Accumulated Depreciation and Amortization			Total Real Estate Investments, Net
Chevron Gas Station	San Jose, CA	5/29/2015	Retail	$	2,775,000	$	—	$	(169,586	)	$	2,605,414
Levins	Sacramento, CA	8/19/2015	Industrial	3,750,000		2,500		(878,826		)	2,873,674
Chevron Gas Station (Note 5)	Roseville, CA	9/30/2015	Retail	2,800,000		—		(386,243		)	2,413,757
Island Pacific Supermarket	Elk Grove, CA	10/1/2015	Retail	3,151,461		568,539		(634,347		)	3,085,653
Dollar General	Bakersfield, CA	11/11/2015	Retail	4,632,567		689,020		(744,153		)	4,577,434
Rite Aid	Lake Elsinore, CA	12/7/2015	Retail	6,663,446		968,285		(904,592		)	6,727,139
PMI Preclinical	San Carlos, CA	12/9/2015	Industrial	8,920,000		—		(779,577		)	8,140,423
EcoThrift	Sacramento, CA	3/17/2016	Retail	4,496,993		541,729		(858,090		)	4,180,632
GSA (MSHA)	Vacaville, CA	4/5/2016	Office	3,011,583		456,645		(495,084		)	2,973,144
PreK San Antonio	San Antonio, TX	4/8/2016	Retail	11,851,540		1,593,451		(3,157,856		)	10,287,135
Dollar Tree	Morrow, GA	4/22/2016	Retail	1,312,491		206,844		(322,782		)	1,196,553
Dinan Cars	Morgan Hill, CA	6/21/2016	Industrial	4,651,845		654,155		(1,251,587		)	4,054,413
Solar Turbines	San Diego, CA	7/21/2016	Office	5,738,978		389,718		(629,078		)	5,499,618
Amec Foster	San Diego, CA	7/21/2016	Industrial	7,010,799		485,533		(796,376		)	6,699,956
ITW Rippey	El Dorado, CA	8/18/2016	Industrial	6,299,982		407,316		(926,714		)	5,780,584
Dollar General Big Spring	Big Spring, TX	11/4/2016	Retail	1,161,647		112,958		(87,326		)	1,187,279
Gap	Rocklin, CA	12/1/2016	Office	7,220,909		677,192		(892,853		)	7,005,248
L-3 Communications	San Diego, CA	12/23/2016	Industrial	11,084,072		961,107		(1,127,548		)	10,917,631
Sutter Health	Rancho Cordova, CA	3/15/2017	Office	24,256,632		2,870,258		(2,945,416		)	24,181,474
Walgreens	Santa Maria, CA	6/29/2017	Retail	4,667,322		448,183		(294,911		)	4,820,594
				$	125,457,267	$	12,033,433	$	(18,282,945	)	$	119,207,755

Current Year Acquisitions and Dispositions

There were no property acquisitions during the nine months ended September 30, 2019 and 2018. See Note 5 regarding an increase in Chevron Gas Station in Roseville, CA ownership from 70.14% to 100%. See Note 6 regarding the March 13, 2019 foreclosure sale of a property previously held in Antioch, California.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Operating Leases

The Company’s real estate properties are primarily leased to tenants under triple-net or double-net leases for which terms and expirations vary. The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies or lease guarantors) that are rated by national recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants (or their parent companies or lease guarantors), and their underlying business and industry; and (4) monitoring the timeliness of rent collections.

As of September 30, 2019, the aggregate future minimum contractual rental income due under the Company’s non-cancelable operating leases, excluding any renewal periods, are as follows:



October through December 2019	$	2,511,047
2020	10,173,108
2021	9,184,307
2022	7,638,623
2023	5,866,735
2024	5,351,961
Thereafter	22,433,451
	$	63,159,232

Revenue Concentration

The Company’s revenue concentration based on tenants representing greater than 10% of total revenues for the three and nine months ended September 30, 2019 and 2018 was as follows:



Property and Location	Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
Property and Location	Revenue		Percentage of Total Revenue		Revenue		Percentage of Total Revenue
Sutter Health, Rancho Cordova, CA	$	659,936	20.2	%	$	663,998	20.2	%
PreK San Antonio, San Antonio, TX	$	400,359	12.2	%	$	386,681	11.7	%



Property and Location	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
Property and Location	Revenue		Percentage of Total Revenue		Revenue		Percentage of Total Revenue
Sutter Health, Rancho Cordova, CA	$	1,983,965	20.2	%	$	2,039,643	20.6	%
PreK San Antonio, San Antonio, TX	$	1,219,672	12.5	%	$	1,242,782	12.6	%

Asset Concentration

The Company’s portfolio’s asset concentration (greater than 10% of total assets) as of September 30, 2019 and December 31, 2018 were as follows:



	September 30, 2019				December 31, 2018
Property and Location	Net Carrying Value		Percentage of Total Assets		Net Carrying Value		Percentage of Total Assets
Sutter Health, Rancho Cordova, CA	$	24,181,474	19.4	%	$	25,050,613	19.0	%

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Intangibles

As of September 30, 2019, the Company’s intangibles were as follows:



	Tenant Origination and Absorption Costs			Above-Market Lease Intangibles			Below-Market Lease Intangibles
Cost	$	12,033,433		$	872,408		$	(5,296,683	)
Accumulated amortization	(4,961,085		)	(117,036		)	2,835,963
Net amount	$	7,072,348		$	755,372		$	(2,460,720	)

Amortization of intangible assets over the next five years is expected to be as follows:



	Tenant Origination and Absorption Costs		Above-Market Lease Intangibles		Below-Market Lease Intangibles
October through December 2019	$	391,005	$	8,830	$	(215,041	)
2020	1,563,083		35,320		(860,165		)
2021	1,563,083		35,320		(667,541		)
2022	832,144		35,320		(201,982		)
2023	687,474		35,320		(113,651		)
2024	479,057		35,320		(113,651		)
Thereafter	1,556,502		569,942		(288,689		)
Total	$	7,072,348	$	755,372	$	(2,460,720	)

Weighted average remaining amortization period	8.1 years		12.4 years		4.2 years

NOTE 5. SALE AND REPURCHASE OF INTEREST IN REAL ESTATE INVESTMENT PROPERTY

In March 2016, the Company entered into a tenancy-in-common agreement and sold an undivided 29.86% interest in the Chevron Gas Station located in Roseville, CA for $1,000,000. The purchaser had the right to require the Company to repurchase their interest in the property during the period from March 1, 2018 through March 1, 2019 for the same amount as the sale. Therefore, the sale did not qualify for sales recognition under ASC 360 for financial reporting purposes and the transaction was accounted for as a financing transaction. The proceeds received from the purchaser were recorded as a sales deposit liability and the payments to the purchaser for their share of the property’s operations were recorded as interest expense.

Following the purchaser's notice of exercise of the put option in the tenancy-in-common agreement on February 21, 2019, the Company and the owner of the 29.86% tenant-in-common interest in the property entered into a purchase and sale agreement whereby the Company agreed to acquire the 29.86% tenant-in-common interest in the property for $1,000,000 no later than May 9, 2019. The transaction was completed on May 9, 2019 and the Company now owns 100% of this Roseville, CA property.

The sales deposit liability of $1,000,000 was presented on the December 31, 2018 condensed consolidated balance sheet. The interest expense recorded as a result of this transaction was $0 and $13,751 for the three months ended September 30, 2019 and 2018, respectively, and $18,334 and $41,252 for the nine months ended September 30, 2019 and 2018, respectively (see Note 7).

NOTE 6. DISPOSAL OF REAL ESTATE INVESTMENT PROPERTY

The Company’s Antioch, California property, which was previously leased primarily by Chase Bank until December 31, 2017, was relinquished in a foreclosure sale on March 13, 2019. As of the foreclosure date, the Antioch, California property had a net book value of $1,850,845 and a related mortgage loan balance of $1,964,618, including accrued interest and expected costs of foreclosure proceedings. During the first quarter of 2019, the Company recorded the difference of $113,773 between the net book value of the property foreclosed and the net carrying value of the mortgage loan as gain on disposal of real estate investment in other income in the Company's condensed consolidated statement of operations.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

The Company had previously determined that due to the decline in expected rental rates and difficulties re-leasing the 5,660 square feet of space at the Antioch, California property, it was necessary to record an impairment charge of $862,190 for the nine months ended September 30, 2018. The impairment charge was less than 1% of the Company’s total investments in real estate property, based on the estimated fair value of the real estate, which approximated the then outstanding balance of the existing mortgage loan. Having not reached any agreement with the lender when the August 2018 mortgage payment came due, the Company’s special purpose subsidiary defaulted on the mortgage loan. The book value of the Antioch property after the impairment charge was less than 2.0% of the Company’s total investments in real estate property.

The loan in default was non-recourse to the Company (except for property taxes, insurance and the lender’s legal fees and other costs incurred prior to the date of foreclosure) and, while eight of the Company’s other special purpose property owner subsidiaries have mortgage loans with this lender, none of those loans are cross-collateralized with the Antioch property loan and the Company’s special purpose subsidiary’s default on that loan did not cross-default any of these other loans. The Company continued to accrue default interest and penalties, as well as property taxes, insurance and the lender’s legal fees and costs through the foreclosure process.

NOTE 7. DEBT

Mortgage Notes Payable

As of September 30, 2019 and December 31, 2018, the Company’s mortgage notes payable consisted of the following:



Collateral	2019 Principal Amount			2018 Principal Amount			Contractual Interest Rate (1)	Effective Interest Rate (1)		Loan Maturity
Chase Bank and Great Clips	$	—		$	1,866,364		4.37%	4.37	%	2/5/2019
Levins	2,091,487			2,125,703			One-month LIBOR + 1.81%	3.74	%	1/5/2021
Island Pacific Supermarket	1,901,859			1,932,973			One-month LIBOR + 1.81%	3.74	%	1/5/2021
Dollar General Bakersfield	2,338,007			2,378,106			One-month LIBOR + 1.90%	3.38	%	3/5/2021
Rite Aid	3,681,078			3,744,915			One-month LIBOR + 1.75%	3.25	%	5/5/2021
PMI Preclinical	4,142,833			4,213,887			One-month LIBOR + 1.90%	3.38	%	3/5/2021
EcoThrift	2,655,472			2,703,239			One-month LIBOR + 1.75%	2.96	%	7/5/2021
GSA (MSHA)	1,807,294			1,839,454			One-month LIBOR + 1.75%	3.00	%	8/5/2021
PreK San Antonio	5,165,587			5,239,125			4.25%	4.25	%	12/1/2021
Dinan Cars	2,724,641			2,764,937			One-month LIBOR + 1.75%	4.02	%	1/5/2022
Solar Turbines, Amec Foster, ITW Rippey	9,488,970			9,648,214			3.35%	3.35	%	11/1/2026
Dollar General Big Spring	613,653			621,737			4.69%	4.69	%	3/13/2022
Gap	3,661,749			3,714,623			4.15%	4.15	%	8/1/2023
L-3 Communications	5,309,254			5,380,085			4.50%	4.50	%	4/1/2022
Sutter Health	14,217,156			14,419,666			4.50%	4.50	%	3/9/2024
Walgreens	3,000,000			—			One-month LIBOR + 5.00%	7.50	%	5/6/2020
Total mortgage notes payable	62,799,040			62,593,028
Less unamortized deferred financing costs	(958,337		)	(1,146,960		)
Mortgage notes payable, net	$	61,840,703		$	61,446,068


(1)	Contractual interest rate represents the interest rate in effect under the mortgage notes payable as of September 30, 2019. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2019 (consisting of the contractual interest rate and the effect of the interest rate swap, if applicable) (see Note 8).

The Company’s independent trust managers and the board of trust managers have set the Company’s maximum leverage ratio at 50%. Factors considered in setting the leverage ratio include the moderate level of 50% leverage, current economic and market conditions, the relative cost of debt and equity capital, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. As of September 30, 2019, the Company's leverage ratio was approximately 46%.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

The mortgage notes payable provide for monthly payments of principal and interest and have balloon payments that are due at loan maturity. Pursuant to the terms of the mortgage notes payable agreements, the Company is subject to certain financial loan covenants. The Company was in compliance with all terms and conditions of the mortgage loan agreements as of September 30, 2019 and December 31, 2018.

As discussed in Note 6, the Company relinquished the Chase Bank/Great Clips property in Antioch, California in a foreclosure sale on March 13, 2019 which discharged the related mortgage note payable including accrued interest. As of the foreclosure date, the Antioch, California property had a net book value of $1,850,845 and a related mortgage loan balance of $1,964,618, including accrued interest and expected costs of foreclosure proceedings. During the first nine months of 2019, the Company recorded the difference of $113,773 between the net book value of the property foreclosed and the net carrying value of the mortgage loan as gain on disposal of real estate investment in other income in the Company's unaudited condensed consolidated statement of operations.

The following were the face value, carrying amount and fair value of the Company’s mortgage notes payable (Level 3 measurement):



September 30, 2019						December 31, 2018
Face value		Carrying value		Fair value		Face Value		Carrying Value		Fair Value
$	62,799,040	$	61,840,703	$	63,412,918	$	62,593,028	$	61,446,068	$	61,283,165

Disclosures of the fair values of financial instruments are based on pertinent information available to the Company as of September 30, 2019 and December 31, 2018 and require a significant amount of judgment. Low levels of transaction volume for certain financial instruments have made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.

The following summarizes the future principal payments on the Company’s mortgage notes payable as of September 30, 2019:



October through December 2019	$	305,282
2020	4,286,152
2021	23,878,718
2022	8,888,775
2023	3,967,628
2024	13,219,282
Thereafter	8,253,203
Total principal	62,799,040
Less deferred financing costs, net	(958,337		)
Net principal	$	61,840,703

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Interest Expense

The following is a reconciliation of the components of interest expense for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Mortgage notes payable:
Interest expense incurred	$	693,774	$	680,468		$	2,040,218	$	1,930,036
Amortization of deferred financing costs	114,888		86,448			305,022		259,344
Loss (gain) on interest rate swaps (1)	20,325		(66,529		)	310,809		(399,783		)
Sales deposit liability:
Interest expense (see Note 5)	—		13,751			18,334		41,252
Total interest expense	$	828,987	$	714,138		$	2,674,383	$	1,830,849

(1)

Includes unrealized loss (gain) on interest rate swaps of $54,538 and $(40,149) for the three months ended September 30, 2019 and 2018, respectively, and $438,704 and $(357,520) for the nine months ended September 30, 2019 and 2018, respectively (see Note 8). Accrued interest receivable, net of $6,959 and $12,432 at September 30, 2019 and December 31, 2018, respectively, represents the unsettled portion of the interest rate swaps for the period from the most recent settlement date through respective balance sheet dates.

NOTE 8. INTEREST RATE SWAP DERIVATIVES

The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.

The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate mortgage notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero.

The notional amount of the Company's interest rate swap derivative instruments is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks. The following table summarizes the notional amount and other information related to the Company’s interest rate swap derivative instruments as of September 30, 2019 and December 31, 2018:

Derivative

Instruments

September 30, 2019

December 31, 2018

Number

Instru-

ments

Notional

Amount (1)

Reference

Rate

Weighted

Average

Fixed

pay rate

Weighted

Average

Remaining

Term

Number

Instru-

ments

Notional

Amount (1)

Reference

Rate

Weighted

Average

Fixed

pay rate

Weighted

Average

Remaining

Term

Interest Rate Swap

Derivatives

21,342,671

One-month LIBOR/Fixed at 1.21%-2.28%

3.42

1.6 years

21,703,214

One-month LIBOR/Fixed at 1.21%-2.28%

3.42

2.4 years


(1)	The notional amount of the Company’s swaps decreases each month to correspond to the outstanding principal balance on the related mortgage. The maximum notional amount is shown above. The minimum notional amount (outstanding principal balance at the maturity date) is $20,546,330 as of September 30, 2019.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the unaudited condensed consolidated balance sheets:



Derivative Instrument		September 30, 2019				December 31, 2018
Derivative Instrument	Balance Sheet Location	Number of Instruments	Fair Value			Number of Instruments	Fair Value
Interest Rate Swaps	Asset - Interest rate swap derivatives, at fair value	5	$	31,420		8	$	404,267
Interest Rate Swaps	Liability - Interest rate swap derivatives, at fair value	3	$	(65,857	)	—	$	—

The change in fair value of a derivative instrument that is not designated as a cash flow hedge is recorded as interest expense in the accompanying unaudited condensed consolidated statements of operations. None of the Company’s derivatives at September 30, 2019 or December 31, 2018 were designated as hedging instruments; therefore, the net unrealized loss (gain) recognized on interest rate swaps of $54,538 and $(40,149) for the three months ended September 30, 2019 and 2018, respectively, and $438,704 and $(357,520) for the nine months ended September 30, 2019 and 2018, respectively, was recorded as a component of loss (gain) on interest rate swap (see Note 7).

NOTE 9. RELATED PARTY TRANSACTIONS

The costs incurred by the Company pursuant to the Advisory Agreement for the three and nine months ended September 30, 2019 and 2018, as well as the related amount payable as of December 31, 2018, are included in the table below. The amount payable is presented in the unaudited condensed consolidated balance sheets as "Due to affiliates."



	Three Months Ended		Nine Months Ended						Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019		September 30, 2019				September 30, 2018		September 30, 2018		December 31, 2018
	Incurred		Incurred		Receivable		Payable		Incurred		Incurred		Receivable		Payable
Expensed:
Asset management fees	$	197,562	$	616,786	$	—	$	—	$	203,763	$	607,728	$	—	$	—
Reimbursable operating expense	90,000		270,000		—		—		67,500		249,015		—		—
Fees to affiliates	287,562		886,786		—		—		271,263		856,743		—		—
Property management fees*	25,571		76,668		—		—		25,763		74,670		—		—
Trust managers and officers insurance and other reimbursements **	39,269		129,785		—		—		18,413		67,079		—		59,992
Reimbursable organizational and offering expenses	—		—		—		—		31,847		95,612		—		—
Capitalized:
Financing coordination fees	—		30,000		—		—		—		—		—		—
					$	—	$	—					$	—	$	59,992


*	Property management fees are included in "property expenses" in the accompanying unaudited condensed consolidated statements of operations.


**	Trust managers and officers insurance and other reimbursements are classified within general and administrative expenses in the unaudited condensed consolidated statements of operations.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Organizational and Offering Expenses

During the Company’s offering of its common stock, which was terminated in July 2016, and for the dividend reinvestment plan which continued after the offering termination, the Company was obligated to reimburse the Advisor or its affiliates for organizational and offering expenses paid by the Advisor on behalf of the Company. The Company reimbursed the Advisor for organizational and offering expenses up to 3.0% of gross offering proceeds. As of December 31, 2018, the Advisor had incurred organizational and offering expenses of $2,796,198, which amount was less than the 3.0% of the gross offering proceeds received by the Company as of December 31, 2018. Therefore, the Company has reimbursed the Advisor for all of these organization and offering expenses, representing the Company's maximum liability.

Acquisition Fees

The Company pays the Advisor an acquisition fee in an amount equal to 2.0% of Company’s contract purchase price of its properties. The total of all acquisition fees and acquisition costs must be reasonable and not exceed 6.0% of the contract price of the properties. However, a majority of the trust managers (including a majority of the independent trust managers) not otherwise interested in an acquisition transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the Company. The Company paid a $20,000 acquisition fee during the third quarter of 2019 in connection with the repurchase of the 29.86% tenant-in-common interest in the Chevron property described in Note 5. Since this acquisition is a repurchase transaction, the Company recorded the related acquisition fee as an expense and was reflected in fees to affiliates in the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2019.

Asset Management Fees

The Company pays the Advisor as compensation for the advisory services rendered, a monthly fee in an amount equal to 0.05% of the Company’s Average Invested Assets, as defined (the "Asset Management Fee"), as of the end of the preceding month. The Asset Management Fee is payable monthly on the last business day of such month. The Asset Management Fee, which must be reasonable in the determination of the Company’s independent trust managers at least annually, may or may not be taken, in whole or in part as to any year, in the sole discretion of the Advisor. All or any portion of the Asset Management Fee not paid as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine. See "Loan from a Related Party" below for a discussion of the temporary deferral of asset management fees in April 2019.

Financing Coordination Fees

Other than with respect to any mortgage or other financing related to a property that is concurrent with its acquisition, if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company’s independent trust managers) in connection with the post-acquisition financing or refinancing of any debt that the Company obtains relative to a property, then the Company will pay to the Advisor or such affiliate a financing coordination fee equal to 1.0% of the amount of such financing. The Company paid a $30,000 financing fee during the third quarter of 2019 in connection with the $3,000,000 bridge loan (see Note 7) and recorded a corresponding deferred financing cost which was presented net of accumulated amortization in the unaudited condensed consolidated balance sheet as a reduction to mortgage notes payable as of September 30, 2019.

Property Management Fees

If the Advisor or any of its affiliates provides a substantial amount of the property management services (as determined by a majority of the Company’s independent trust managers) for the Company’s properties, then the Company pays the Advisor or such affiliate a property management fee equal to 1.5% of gross revenues from the properties managed. The Company also will reimburse the Advisor and any of its affiliates for property-level expenses that such person pays or incurs on behalf of the Company, including salaries, bonuses and benefits of persons employed by such person, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers or as an executive officer of such person. The Advisor or its affiliate may subcontract the performance of its property management duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services. See "Loan from a Related Party" below for a discussion of the temporary deferral of property management fees in April 2019.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Disposition Fees

For substantial assistance in connection with the sale of properties, the Company pays the Advisor or one of its affiliates 3.0% of the contract sales price, as defined, of each property sold; provided, however, that if, in connection with such disposition, commissions are paid to third parties unaffiliated with the Company’s Advisor or its affiliates, the disposition fees paid to its Advisor, its affiliates and unaffiliated third parties may not exceed the lesser of the competitive real estate commission or 6.0% of the contract sales price.

Leasing Commission Fees

If the Advisor or any of its affiliates provides a substantial amount of the services (as determined by a majority of the Company’s independent trust managers) in connection with the Company’s leasing of its properties to unaffiliated third parties, then the Company shall pay to the Advisor or such affiliate leasing commissions equal to 6.0% of the rents due pursuant to such lease for the first ten years of the lease term; provided, however (i) if the term of the lease is less than ten years, such commission percentage will apply to the full term of the lease and (ii) any rents due under a renewal of a lease of an existing tenant upon expiration of the initial lease agreement (including any extensions provided for thereunder) shall accrue a commission of 3.0% in lieu of the aforementioned 6.0% commission.

Operating Expense Reimbursement

Total operating expenses of the Company are limited to the greater of 2% of average invested assets or 25% of net income for the four most recently completed fiscal quarters (the "2%/25% Limitation"). If the Company exceeds the 2%/25% Limitation, the Advisor must reimburse the Company the amount by which the aggregate total operating expenses exceeds the limitation, or the Company must obtain a waiver from the Company’s conflicts committee, which is comprised of its independent trust managers. For purposes of determining the 2%/25% Limitation amount, "average invested assets" means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. "Total operating expenses" means all expenses paid or incurred by the Company, as determined by GAAP, that are in any way related to the Company’s operation including Asset Management Fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based upon increases in net asset value ("NAV") per share; (f) acquisition fees and acquisition expenses (including expenses, relating to potential investments that the Company does not close); and (h) disposition fees on the sale of real property and other expenses connected with the acquisition, disposition and ownership of real estate interests or other property (other than disposition fees on the sale of assets other than real property), including the costs of insurance premiums, legal services, maintenance, repair and improvement of real property.

Operating expenses for the four fiscal quarters ended September 30, 2019 did not exceed the 2%/25% Limitation.

Related Party Investment in the Company

The investment in the Company by NNN REIT totaled 403,980 shares, or an approximate 4.8% ownership interest, as of September 30, 2019 and December 31, 2018.

Loan from a Related Party

On April 24, 2019, the Company obtained a $200,000 short-term loan from Mr. Wirta, the Company's Chairman of the Board, at an annual interest rate of 10%. This loan was repaid, along with accrued interest of $768 on May 8, 2019.

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RICH UNCLES REAL ESTATE INVESTMENT TRUST I

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

NOTE 10. COMMITMENTS AND CONTINGENCIES

Economic Dependency

The Company depends on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of real estate property investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event the Advisor is unable to provide the respective services, the Company would be required to obtain such services from other sources.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the property could result in future environmental liabilities.

Tenant Improvements

Pursuant to lease agreements, the Company has an obligation to pay for an aggregate of $63,000 and $207,000 in tenant improvements as of September 30, 2019 and December 31, 2018, respectively, for a certain property. At September 30, 2019 and December 31, 2018, the Company had $92,684 and $462,140, respectively, of restricted cash held by a lender to fund tenant improvements for this property.

Legal and Regulatory Matters

From time to time, the Company may become party to legal proceedings that arise in the ordinary course of its business. The Company is not a party to any legal proceeding, nor is the Company aware of any pending or threatened litigation that could have a material adverse effect on the Company’s business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably.

Beginning in 2017, the SEC conducted an investigation of the Company's Advisor and REITs that are affiliated with the Advisor. Recently, the Company’s Advisor proposed a settlement of the investigation to the SEC and, on September 26, 2019, the SEC accepted the settlement and entered an order (the “Order”) instituting proceedings against the Advisor pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act. The Company is not a party to the settlement and understands that the staff of the enforcement division of the SEC did not recommend any action against the Company.

Under the settlement, the Advisor, without denying or admitting any substantive findings in the Order, consented to entry of the Order, finding violations by it of Section 5(b)(1) of the Securities Act and Section 15(a) of the Exchange Act. The Order does not find that the Sponsor violated any anti-fraud provisions of the federal securities laws or any other law and does not find any criminal violations or any scienter based violation involving the offer and sale of securities. Under the terms of the Order, the Advisor (i) agreed to cease-and-desist from committing or causing any future violations of Section 5(b) of the Securities Act and Section 15(a) of the Exchange Act, (ii) paid to the SEC a civil money penalty in the amount of $300,000, and (iii) agreed to undertake that any real estate investment trust which is or was formed, organized, or advised by it, including the Company, will not distribute securities except through a registered broker-dealer.

NOTE 11. SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the unaudited condensed consolidated financial statements are issued.

Dividends

On October 14, 2019, the Company’s Board declared dividends based on daily record dates for the period July 1, 2019 through September 30, 2019 at a rate of $0.00203804 per share per day, or $1,564,219, on the outstanding shares of the Company’s common stock, which the Company paid in cash on October 25, 2019.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition, results of operations and cash flows together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 27, 2019. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q, in the “Risk Factors” section of the Joint Proxy Statement included in our Schedule 14A filed with the SEC on October 22, 2019 and filed as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

See "Forward-Looking Statements" above.

Management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates which are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Overview

We were formed in 2012 as an unincorporated real estate investment trust ("REIT"), under the laws of the State of California. We have invested primarily in single tenant income-producing properties which are leased to creditworthy tenants under long-term net leases. Although we are not limited as to the form our investments may take, our investments in real estate were generally made by acquiring fee title or interests in entities that own and operate real estate. We have made acquisitions of our real estate investments directly or indirectly through limited liability companies or limited partnerships.

We elected to be taxed as a REIT for U.S. federal income tax purposes under Section 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with our taxable year ended December 31, 2014. As a REIT, we generally will not be subject to federal income tax on the income that we distribute to our shareholders each year. If we fail to qualify for taxation as a REIT in any year after electing REIT status, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Such an event could materially and adversely affect our net income and cash available for distribution to our shareholders. However, we believe that we will be organized and will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes and we intend to continue to operate so as to remain qualified as a REIT for federal income tax purposes thereafter.

Subject to certain restrictions and limitations, our business is externally managed by our advisor pursuant to an Advisory Agreement with BrixInvest, LLC (our "Advisor"), d/b/a Rich Uncles LLC, which manages our operations and manages our portfolio of core real estate properties and real estate related assets. Our Advisor is paid certain fees as set forth in Note 9 to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Through October 31, 2019, we had sold 9,483,599 shares of common stock, including 1,270,279 shares of common stock sold under our dividend reinvestment plan, for gross offering proceeds of $95,163,787. No new shares were sold since the suspension on April 23, 2019 of the Company’s dividend reinvestment plan. As discussed below, all subsequent dividends payments will be paid in cash.

We have invested primarily in single tenant income-producing properties which are leased to creditworthy tenants under long-term net leases. We diversified our portfolio by geography, investment size, and investment risk with the goal of owning a portfolio of income-producing real estate investments that provides attractive and stable returns to our shareholders.

Our investment objectives and policies may be amended or changed at any time by our board of trust managers (our "Board"). Although we have no plans at this time to change any of our investment objectives, our Board may change any and all such investment objectives, including our focus on single tenant properties, if our Board believes such changes are in the best interest of our shareholders.

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Our Advisor made recommendations on all investments to our Board. All proposed real estate investments must be approved by at least a majority of our Board subject to guidelines established by our Board which, if a proposed investment fits within such guidelines, specific Board approval would not be needed.

As of September 30, 2019, we owned 20 single-tenant, net-leased properties in three states consisting of retail, office and industrial properties. The net book value of these properties was $119,207,755 at September 30, 2019.

Pending Merger Transaction

In January 2019, we commenced a review of strategic alternatives which included the public marketing of our entire 20-property real estate portfolio for disposition by sale, merger or other transaction structure, subject to the approval of our shareholders. Numerous potential acquirors participated in a public multi-round process resulting in a short list of bidders, including NNN REIT, submitting bids to a special committee of our Board consisting of all of our independent trust managers (the “Special Committee”) for review. Following a review of those bids, on June 21, 2019, we announced that we were engaged in an exclusive due diligence process with NNN REIT and on September 20, 2019, we announced that we had entered in to an Agreement and Plan of Merger (the "Merger Agreement") with NNN REIT. Subject to the terms and conditions of the Merger Agreement, we will merge with and into Merger Sub, with Merger Sub surviving as a direct, wholly-owned subsidiary of NNN REIT (the “Merger”). At such time, our separate existence shall cease. The Merger is subject to certain closing conditions, including the approval of the Merger by both our shareholders and NNN REIT’s stockholders, as discussed below. The Merger is expected to close as soon as practicable following our shareholders' meeting, which is scheduled for December 17, 2019, and the satisfaction of the closing conditions. There can be no assurance that the Merger will close.

The combined company following the Merger (the “Combined Company”) will retain the name “RW Holdings NNN REIT, Inc.” The Merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each of our common shares (the "Common Shares") issued and outstanding immediately prior to the effective time of the Merger (other than Common Shares owned by NNN REIT or any wholly-owned subsidiary of NNN REIT) will be automatically canceled and retired, and converted into the right to receive one share of Class C common stock of NNN REIT (the “Class C Common Stock”), with any fractional Common Shares converted into a corresponding number of fractional shares of Class C Common Stock.

On October 22, 2019, we filed the Joint Proxy Statement on Schedule 14A with the U.S. Securities and Exchange Commission (the “SEC”) with NNN REIT relating to our special meeting of shareholders to be held to vote on the Merger and the Merger Agreement, as well as other matters. Shareholders of record on October 21, 2019 are eligible to vote on the proposal to approve the Merger and an Amendment to our Declaration of Trust.

If shareholder approval is obtained and other conditions to the transaction are satisfied, then the Merger would proceed in accordance with its negotiated terms. While we remain optimistic at this stage of the process, there can be no assurance that the Merger will occur at any time, or at all, or that the Merger will conclude during 2019.

We also suspended the redemptions of common stock under our share repurchase program in January 2019 in connection with the strategic alternatives review process and suspended the dividend reinvestment plan in April 2019. All subsequent dividend payments have been or will be paid in cash. If the Merger is approved, the board of directors of the Combined Company will determine when it is in the best interest of the Combined Company to resume the share repurchase program and the dividend reinvestment plan.

If the Merger is approved, the amount of future distributions, and the declaration and payment thereof, and whether or not to reinstate the dividend reinvestment plan will be determined by the board of directors of the Combined Company based on the Combined Company's financial condition and such other factors as the board of directors of the Combined Company deems relevant. Our operating performance and the timing and amount of future distributions is subject to risks and uncertainties as described under “Risk Factors” in part II, Item 1A below, in the Joint Proxy Statement and in our Annual Report on Form 10-K for the year ended December 31, 2018.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Company

We are a publicly registered, non-exchange traded company dedicated to providing shareholders with dependable quarterly dividends. We believe we are qualified and operate as a REIT, which requires us to annually distribute at least 90% of our taxable income (excluding net capital gains) in the form of dividends to our shareholders. Our quarterly dividends are supported by the cash flow generated from real estate we own under long-term, net lease agreements with local, regional, and national commercial tenants.

As of September 30, 2019, we owned a diversified portfolio of 20 properties as described below:


•	Ten properties are retail properties which represent 32% of the portfolio, four properties are office properties which represent 34% of the portfolio, and six properties are industrial properties which represent 34% of the portfolio (expressed as a percentage of base rental revenue);


•	Fully leased, with an occupancy rate of 100% based on square footage;


•	Leased to 20 different commercial tenants doing business in three separate property types, namely: retail, office and industrial;


•	Located in three states, primarily California;


•	With approximately 607,000 square feet of aggregate leasable space, of which approximately 177,000 square feet is retail property, approximately 184,000 square feet is office property, and approximately 246,000 square feet is industrial property;


•	With an average leasable space per property of approximately 30,000 square feet; and


•	With an outstanding debt balance of $61,840,703, net of deferred financing costs of $958,337.

As of September 30, 2019, all 20 properties are single-tenant properties and were leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 5.9 years based on square footage. The Walgreens Santa Maria, California property has a remaining lease term of 41.9 years as of September 30, 2019, provided the tenant does not exercise any of its eight early termination options. Reflecting termination options for the Walgreens lease, results in a weighted average remaining lease term of approximately 4.7 years.

Investment Strategy

Our investment strategy is to primarily own single-tenant office, industrial and retail real estate leased to creditworthy tenants on long-term leases. We expect that our portfolio of properties will contain a mix of properties that are leased to investment grade public companies, non-investment grade public companies, and non-public companies (or individuals). Some of the properties we intend to acquire will be leased to public companies.

Many public companies have their creditworthiness analyzed by bond rating firms such as Standard & Poor’s and Moody’s. These firms issue credit rating reports which segregate public companies into what are commonly called “investment grade” companies and “non-investment grade” companies. The creditworthiness of investment grade public companies is generally regarded as very high. As to prospective property acquisitions leased to other than investment grade tenants, we intend to analyze publicly available information and/or information regarding tenant creditworthiness provided by the sellers of such properties and then make a determination in each instance as to whether we believe the subject tenant has the financial fortitude to honor its lease obligations.

We do not intend to systematically analyze tenant creditworthiness on an ongoing basis, post-acquisition. Many leases will limit our ability as landlord to demand on recurring bases non-public tenant financial information. It will be our policy and practice, however, to monitor public announcements regarding our tenants, as applicable, and tenant payment histories. We assembled our real estate portfolio by seeking properties that have the following characteristics:


•	freestanding, and commercially zoned with a single tenant;


•	located in significant markets, which markets are identified and ranked based on several key demographic and real estate specific metrics such as population growth, income, unemployment, job growth, GDP growth, rent growth, and vacancy rates;


•	no more than 20% of the properties located outside of California;


•	located in strategic locations critical to generating revenue for the tenants that occupy them (i.e., the tenants need the properties in which they operate in order to conduct their businesses);


•	located within attractive demographic areas relative to the business of our tenants and are generally fungible and have good visibility and easy access to major thoroughfares;


•	with rental or lease payments that approximate or are lower than market rents; and


•	purchased with the simultaneous execution or assumption of long-term, net lease agreements, offering both current income and the potential for future rent increases.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

See Note 1 to our unaudited condensed consolidated financial statements for further information on our business and organization and Pending Merger Transaction above.

Liquidity and Capital Resources

Liquidity

Our proceeds from shares sold have been our primary source of liquidity, primarily used for (i) property acquisitions; (ii) capital expenditures; (iii) payment of principal on our outstanding mortgage indebtedness; and (iv) stock repurchases. Going forward, our cash needs for real estate investments such as tenant improvements and capital expenditures will be funded primarily from asset sales or from debt proceeds. On May 7, 2019 one of our special purpose subsidiaries borrowed $3,000,000 under a new mortgage loan secured by the Walgreens property to provide us with additional liquidity (see Note 7 to our unaudited condensed consolidated financial statements).

At September 30, 2019, the outstanding principal balance of our mortgage notes payable was $62,799,040 (see Note 7 to our unaudited condensed consolidated financial statements regarding details of our outstanding indebtedness).

Capital Resources

Generally, our cash requirements for debt payments, capital expenditures, and other investments will be funded by borrowings from financial institutions and mortgage indebtedness on our properties, asset sales and to a lesser extent, by our internally generated funds. Our cash requirements for operating and interest expenses and dividend distributions will generally be funded by internally generated funds. Our cash requirements for repurchases of common stock have generally been funded by offering proceeds from our dividend reinvestment plan which is currently suspended. If available, future sources of capital include secured or unsecured borrowings from banks or other lenders and proceeds from the sale of properties.

Cash Flows Summary

The following table summarizes our cash flows activities for the nine months ended September 30, 2019 and 2018:



	2019			2018
Net cash provided by operating activities	$	4,245,655		$	3,936,503
Net cash used in investing activities	$	(1,310,644	)	$	(423,631	)
Net cash used in financing activities	$	(3,422,846	)	$	(5,722,253	)

Cash Flows from Operating Activities

For the nine months ended September 30, 2019 and 2018, net cash provided by operating activities was $4,245,655 and $3,936,503, respectively.

The cash provided by operating activities during the nine months ended September 30, 2019 reflects adjustments to our net loss of $1,179,431 for net non-cash charges of $4,396,543, primarily related to depreciation and amortization, unrealized loss on interest rate swap valuations, amortization of deferred financing costs and stock compensation expense, partially offset by amortization of below-market leases, gain on disposal of real estate investment and amortization of deferred rents. Cash was also provided by a change in operating assets and liabilities of $1,028,543 during the nine months ended September 30, 2019 due to increases in accounts payable, accrued and other liabilities and decreases in tenant receivables and other assets, offset in part by a decrease in due to affiliates.

The cash provided by operating activities during the nine months ended September 30, 2018 reflects adjustments to our net loss of $605,747 for net non-cash charges of $4,372,114, primarily related to depreciation and amortization, impairment of real estate investment property, amortization of deferred financing costs, stock compensation expense, provision for doubtful accounts, and amortization of above-market lease intangibles, partially offset by amortization of below-market lease intangibles, unrealized gain on interest rate swap valuations and amortization of deferred rents. Cash was also provided by a change in operating assets and liabilities of $170,136 during the nine months ended September 30, 2018 due to increases in accounts payable, accrued and other liabilities and due to affiliates, offset in part by increases in tenant receivables and other assets.

We expect that our cash flows from operating activities will reflect flat to modest increases in the next 12 months as a result of contractual increases in rental revenues from our properties.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash Flows from Investing Activities

Net cash used in investing activities was $1,310,644 for the nine months ended September 30, 2019, and consisted of the following:


•	$310,644 of additions to existing real estate investment properties; and


•	$1,000,000 for repayment of the refundable sales deposit in connection with acquisition of the 29.86% interest in Chevron Roseville, CA property.

Net cash used in investing activities was $423,631 for the nine months ended September 30, 2018, which reflected the additions to our existing real estate investment properties.

Cash Flows from Financing Activities

Net cash used in financing activities was $3,422,846 for the nine months ended September 30, 2019 and consisted of the following:


•	$927,624 for repayments of mortgage notes payable;


•	$94,864 for payments of deferred financing costs to third parties and $30,000 for deferred financing costs paid to affiliates;


•	$1,699,103 for repurchases of common stock; and


•	$3,671,255 for dividends paid to common shareholders; partially funded by


•	$3,000,000 of proceeds from a mortgage notes payable.

Net cash used in financing activities was $5,722,253 for the nine months ended September 30, 2018 and consisted of the following:


•	$901,298 for repayments of mortgage notes payable;


•	$3,189,931 for repurchases of common stock;


•	$1,525,412 for dividends paid to common stock shareholders;


•	$95,612 for reimbursement of offering costs; and


•	$10,000 for refundable loan deposit.

Results of Operations

We owned 20 and 21 real estate properties at September 30, 2019 and 2018, respectively. We expect our rental income and tenant reimbursements to remain relatively flat to slightly higher for the remainder of the year due to rental escalations. We expect our depreciation and amortization expense and asset management fees to affiliates to remain relatively flat due to stability in the portfolio and expect our interest expense to trend slightly lower in 2019 due to declining debt balances.

Comparison of the Three Months Ended September 30, 2019 to the Three Months Ended September 30, 2018

Rental Income

Rental income, including tenant reimbursements, was $3,302,347 and $3,293,384 for the three months ended September 30, 2019 and 2018, respectively. The increase of $8,963 or 0.3% quarter-over-quarter was primarily due to the reconciliation of tenant reimbursements in prior year resulting in lower common area maintenance in the prior year quarter, offset in part by lower property taxes in the current year quarter. Rental income was relatively flat quarter-over quarter. The annualized base rental income of the operating properties owned by us as of September 30, 2019 was $9,913,000.

Fees to Affiliates/Expense Reimbursements

Fees to affiliates, comprised of asset management fees and reimbursable operating expense, were $287,562 and $271,263 for the three months ended September 30, 2019 and 2018, respectively, an increase of $16,299 or 6.0%, quarter-over-quarter. Asset management fees included in the fees to affiliate were $197,562 and $203,763 for the three months ended September 30, 2019 and 2018, respectively. The reduction quarter-over-quarter was due to the foreclosure and sale of the Antioch, California property. The asset management fees are equal to 0.6% per annum of our Average Invested Assets.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

In addition, subject to certain limitations, we reimburse our Advisor for costs incurred in connection with services provided to us, including, without limitation, our allocable share of the accounting personnel (and related employment) costs and overhead incurred by our Advisor or its affiliates. Operating expense reimbursements were $90,000 and $67,500 for the three months ended September 30, 2019 and 2018, respectively. The increase quarter-over-quarter was due to higher personnel and overhead costs allocated by our Advisor during the current year quarter.

General and Administrative

General and administrative expenses were $851,721 and $230,299 for the three months ended September 30, 2019 and 2018, respectively. The increase of $621,422 or 269.8% quarter-over-quarter primarily reflects $780,846 of due diligence costs incurred related to our pending Merger with NNN REIT, representing primarily fees and legal costs of SunTrust, the financial advisor to the Special Committee, along with legal fees for the Special Committee's legal counsel.

Depreciation and Amortization

Depreciation and amortization expense was $1,450,227 and $1,424,669 for the three months ended September 30, 2019 and 2018, respectively. The increase of $25,558 or 1.8% quarter-over-quarter was primarily due to the depreciation of additions to existing real estate investments related to tenant improvements, offset in part by the reduction in depreciation related to the foreclosure and sale of the Antioch, California property late in the first quarter of 2019. The purchase price of the acquired properties is allocated to tangible assets, identifiable intangibles and assumed liabilities. The tangible assets and identifiable intangibles are depreciated or amortized over their estimated useful lives.

Interest Expense

Interest expense was $828,987 and $714,138 for the three months ended September 30, 2019 and 2018, respectively. The increase of $114,849 or 16.1% quarter-over-quarter was primarily due to a loss on interest rate swap valuations of $20,325 in the third quarter of 2019 compared to a gain of $66,529 in the third quarter of 2018. Interest expense also increased by $27,995 primarily due to the additional interest and fees on the new loan secured by the Walgreen's property, exclusive of the effect of the interest rate swap valuations.

Property Expenses

Property expenses were $607,706 and $631,985 for the three months ended September 30, 2019 and 2018, respectively. The decrease of $24,279 or 3.8% quarter-over quarter was primarily due to the reduction in repairs and maintenance and property tax during the current year quarter. In addition, the decrease period-over period was due to the provision for doubtful accounts in the prior year period, with no comparable amount in the current year period.

Property management fees to affiliate were $25,571 and $25,763 for the three months ended September 30, 2019 and 2018, respectively, representing management of certain of our properties by an affiliate of our Advisor.

Comparison of the Nine Months Ended September 30, 2019 to the Nine Months Ended September 30, 2018

Rental Income

Rental income, including tenant reimbursements, was $9,868,701 and $9,889,765 for the nine months ended September 30, 2019 and 2018, respectively. The slight decrease of $21,064 or 0.2% period-over-period primarily reflects lower rental income from the Antioch, California property due to the foreclosure and sale of the property on March 13, 2019 and lower lease payments negotiated by a tenant that went through a restructuring during the second quarter of 2018. Tenant reimbursements was generally flat period-over-period. The increase in property management fee was offset by decreases in common area maintenance, insurance and property taxes. The annualized base rental income of the operating properties owned by us as of September 30, 2019 was $9,913,000.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Fees to Affiliates/Expense Reimbursements

Fees to affiliate, comprised of asset management fees, an acquisition fee and reimbursable operating expense, were $886,786 and $856,743 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $30,043 or 3.5% period-over-period. Asset management fees included in fees to affiliate were $596,786 and $607,728 for the nine months ended September 30, 2019 and 2018, respectively. The current year quarter-over-quarter increase included a $20,000 acquisition fee paid during the third quarter of 2019 in connection with the repurchase of the 29.86% tenant-in-common interest in the Chevron property described in Note 5. Since the acquisition was a repurchase transaction, we recorded the related acquisition fee as an expense and is reflected it in fees to affiliates in the current year period. The increase in asset management fees was offset in part by a reduction in fees due to the foreclosure of the Antioch, California property. The asset management fees are equal to 0.6% per annum of our Average Invested Assets.

In addition, subject to certain limitations, we reimburse our Advisor for costs incurred in connection with services provided to us, including, without limitation, our allocable share of the accounting personnel (and related employment) costs and overhead incurred by our Advisor or its affiliates. Operating expense reimbursements were $270,000 and $249,015 for the nine months ended September 30, 2019 and 2018, respectively.

General and Administrative

General and administrative expenses were $1,452,538 and $760,559 for the nine months ended September 30, 2019 and 2018, respectively. The overall increase of $691,979 or 91.0% period-over-period primarily reflects $780,846 due diligence costs incurred related to our pending Merger with NNN REIT, representing primarily fees and legal costs of the financial advisor to the Special Committee, along with legal fees for the Special Committee's legal counsel.

Depreciation and Amortization

Depreciation and amortization expense was $4,336,641 and $4,282,006 for the nine months ended September 30, 2019 and 2018, respectively. The increase of $54,635 or 1.3% period-over-period was primarily due to the depreciation of additions to existing real estate investments related to tenant improvements, offset in part by the reduction in depreciation related to the foreclosure and sale of the Antioch, California property in the first quarter of 2019. The purchase price of the acquired properties is allocated to tangible assets, identifiable intangibles and assumed liabilities. The tangible assets and identifiable intangibles are depreciated or amortized over their estimated useful lives.

Interest Expense

Interest expense was $2,674,383 and $1,830,849 for the nine months ended September 30, 2019 and 2018, respectively. The increase of $843,534 or 46.1% period-over-period was primarily due to a loss on interest rate swap valuations of $310,809 in the first nine months of 2019 compared to a gain of $399,783 in the first nine months of 2018. Interest expense also increased by $132,942 exclusive of the of effect of the interest rate swap valuations, primarily due to the additional interest and fees on the new loan secured by the Walgreen's property, partially offset by the absence of expense for the Antioch property after March 13, 2019.

Property Expenses

Property expenses were $1,811,557 and $1,903,165 for the nine months ended September 30, 2019 and 2018, respectively. The decrease of $91,608 or 4.8% period-over-period was primarily due to the provision for doubtful accounts in the prior year period, with no comparable amount in the current year period. In addition, the costs of utilities, property tax and insurance decreased during the current year period primarily due to foreclosure and sale of the Antioch, California property in the first quarter of 2019, partially offset by an increase in repairs and maintenance expenses.

Property management fees to affiliate were $76,668 and $74,670 for the nine months ended September 30, 2019 and 2018, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Gain on disposal of real estate investment property

The gain on sale of real estate investment property of $113,773 for the nine months ended September 30, 2019 was due to the difference between the mortgage loan balance and related interest payable of the Antioch, California property compared to its net book value when it was relinquished in a foreclosure sale on March 13, 2019.

Impairment of Investment in Real Estate Property

The impairment of investment in real estate property of $862,190 for the nine months ended September 30, 2018 was related to the impairment of our property in Antioch, California due to the expiration of the lease term at December 31, 2017 and our subsequent difficulties encountered during the second quarter of 2018 in our efforts to re-lease the property at acceptable rent rates.

Organizational and Offering Costs

Our organizational and offering costs were paid by our Advisor on our behalf. Offering costs included all expenses incurred in connection with the offering. Other organizational and offering costs include all expenses incurred in connection with our formation, including, but not limited to legal fees, federal and state filing fees, and other costs to incorporate.

We were obligated to reimburse our Advisor for organizational and offering costs related to the offering paid by them on our behalf provided such reimbursement would not exceed 3.0% of gross offering proceeds raised in the offering as of the date of the reimbursement.

As of September 30, 2019, we had not incurred any organizational and offering costs related to the offering as all such costs had been funded by our Advisor. As a result, these organizational and offering costs related to the offering are not recorded in our condensed consolidated financial statements as of September 30, 2019 other than to the extent of 3.0% of the gross offering proceeds. Through December 31, 2018, our Advisor had incurred organizational and offering costs on our behalf in connection with our offering of $2,796,198. Through December 31, 2018, we had recorded and paid $2,796,198 of organizational and offering costs, which was our maximum liability.

Dividends

Dividends declared, dividends paid in cash and/or reinvested, and cash flows provided by operations were as follows:



	Dividends Declared		Dividends Declared Per Share		Dividends Paid				Cash Flows Provided By Operating Activities (1)
Period (3)	Dividends Declared		Dividends Declared Per Share		Cash		Reinvested		Cash Flows Provided By Operating Activities (1)
First Quarter 2018	$	1,566,934	$	0.1875	$	478,674	$	1,088,260	$	1,566,444
Second Quarter 2018	1,574,919		0.1875		534,554		1,040,365		907,398
Third Quarter 2018	1,573,763		0.1875		512,184		1,061,579		1,462,661
Fourth Quarter 2018	1,568,050		0.1875		502,769		1,065,281		1,357,088
2018 Totals	$	6,283,666	$	0.7500	$	2,028,181	$	4,255,485	$	5,293,591

First Quarter 2019	$	1,576,268	$	0.1875	$	525,529	$	1,047,460	$	1,553,648
Second Quarter 2019 (2)	1,579,226		0.1875		1,582,505		—		1,178,037
Third Quarter of 2019 (2)	1,563,221		0.1875		1,563,221		—		1,513,970
2019 Totals	$4,718,715		$	0.5625	$	3,671,255	$	1,047,460	$	4,245,655


(1)	Since dividends are declared after the end of a quarter, the cash flows provided by operating activities in this column are for the quarter of the dividend period rather than the quarter for which dividends were declared. Proceeds from property sales may also be used to fund dividends.


(2)	The Company suspended the dividend reinvestment plan in April 2019 during the strategic alternatives review process (see Note 1 for more discussion). All subsequent dividend payments will be paid in cash.


(3)	Dividends are paid on a quarterly basis. In general, dividends for record dates as of the end of a given quarter are paid on or about the 25th of the first month following the quarter-end. Dividends were declared and paid based on daily record dates at rates per share per day as follows:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)



Dividend Period	Rate Per Share Per Day		Declaration Date	Payment Date
January 1 - March 31, 2018	$	0.00208333	April 24, 2018	April 25, 2018
April 1 - June 30, 2018	$	0.00206044	July 23, 2018	July 25, 2018
July 1 - September 30, 2018	$	0.00203804	October 25, 2018	October 25, 2018
October 1 - December 31, 2018	$	0.00203804	January 22, 2019	January 25, 2018
January 1 - March 31, 2019	$	0.00208333	April 23, 2019	April 25, 2019
April 1 2019 - June 30, 2019	$	0.00206044	July 15, 2019	July 25, 2019
July 1 - September 30, 2019	$	0.00203804	October 14, 2019	October 25, 2019

If the Merger is approved, dividends will be determined by the board of Directors of the Combined Company based on the financial condition of the Combined Company and such other factors as board of Directors of the Combined Company deems relevant. We have not established a minimum dividend or distribution level, and our charter does not require that we make dividends to our shareholders other than as necessary to meet REIT qualification requirements.

To date, the sources of cash used to pay our shareholder dividends have been primarily from net rental income received and property sales. During April 2019, in order to fund the increase in cash dividends which resulted from suspension of our dividend reinvestment program, our Advisor deferred $301,000 of asset management and property management fees and on April 24, 2019 we borrowed $200,000 from Mr. Wirta, our Chairman of the Board, as further described in Note 9 to our unaudited condensed consolidated financial statements. Following receipt of new loan proceeds from the bridge loan financing secured by the Walgreens property in May 2019, the Advisor's fees were paid and the loan from Mr. Wirta was repaid.

Properties

Portfolio Information

Our real estate investments as of September 30, 2019 and December 31, 2018 were as follows:



	September 30, 2019	December 31, 2018
Number of properties:
Retail (1)	10	11
Office	4	4
Industrial	6	6
Total	20	21

Leasable square feet:
Retail (1)	177,380	184,388
Office	183,752	183,752
Industrial	246,259	246,259
Total	607,391	614,399


(1)	The Antioch, California property with an area of 7,008 square feet was relinquished in a foreclosure sale on March 13, 2019 (see Note 6 to our unaudited condensed consolidated financial statements for more details).

As of September 30, 2019, we owned 20 properties in three states as follows: (i) 17 in California, (ii) two in Texas and (iii) one in Georgia. We were in the offering stage of our life cycle through July 20, 2016. Acquisitions of all assets owned had been completed through June 2017. We have fully invested the offering proceeds (see Note 4 of our unaudited condensed consolidated financial statements).

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Recent Market Conditions

Currently, both the investing and leasing environments are highly competitive. While there has been an increase in the amount of capital flowing into the U.S. real estate markets, which resulted in an increase in real estate values in certain markets, the uncertainty regarding the economic and political environment has made many businesses reluctant to make long-term commitments or changes in their business plans.

We relied on debt financing to finance our real estate properties and we may have difficulty refinancing some of our debt obligations prior to or at maturity, or we may not be able to refinance these obligations at terms as favorable as the terms of our initial indebtedness and we also may be unable to obtain additional debt financing on attractive terms or at all. If we are not able to refinance our initial indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets. As financial market conditions have generally stabilized and remain in a mature economic cycle, material risks are still present, including but not limited to a potentially rising interest rate environment. Market conditions can change quickly, which could negatively impact the value of our assets.

Disruptions in the financial markets and uncertain economic conditions could adversely affect the values of our investments. Lending activity is generally available; however, it remains uncertain whether the capital markets can sustain the current transaction levels. The inverted yield curve could be an indicator of a future recession. Potential declines in economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio, which could have the following negative effects on us:


•	the values of our investments in commercial properties could decrease below the amounts paid for such investments; and/or


•	revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to pay dividends or meet our debt service obligations on debt financing.

Election to be Taxed as a REIT

We elected to be taxed as a REIT for U.S. federal income tax purposes under Section 856 through 860 of the Internal Revenue Code of 1986, as amended beginning with the taxable year ended December 31, 2014. To qualify and maintain our status as a REIT, we must meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our shareholders and recordkeeping. As a REIT, we generally would not be subject to federal income tax on taxable income that we distribute to our shareholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains).

If we fail to qualify as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct dividends paid to our shareholders in any year in which we fail to qualify as a REIT. We also will be disqualified for the four taxable years following the year during which qualification is lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to shareholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our condensed consolidated financial statements. We will be subject to certain state and local taxes related to the operations of properties in certain locations. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our condensed consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Critical Accounting Policies and Estimates

Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our December 31, 2018 audited consolidated financial statements included in our Annual Report on Form 10-K, filed with the SEC on March 27, 2019. There have been no significant changes to our accounting policies during the three months ended September 30, 2019.

Commitments and Contingencies

We may be subject to certain commitments and contingencies with regard to certain transactions (see Note 10 to our unaudited condensed consolidated financial statements for details of commitment and contingencies).

Related-Party Transactions and Agreements

We have entered into an Advisory Agreement with our Advisor whereby we have agreed to pay certain fees to, or reimburse certain expenses of, our Advisor or our affiliates, such as acquisition fees and expenses, organization and offering costs, asset management fees, and reimbursement of certain operating costs (see Note 9 to our unaudited condensed consolidated financial statements and our Annual Report on Form 10-K, filed with the SEC on March 27, 2019 for additional details of the various related-party transactions and agreements). In addition, see disclosure under "Loans from a related party" included in Note 9 in our unaudited condensed consolidated financial statements included herein.

Subsequent Events

See Note 11 to our unaudited condensed consolidated financial statements for significant events that occurred subsequent to September 30, 2019 through the filing date of this report.

Recent Accounting Pronouncements

See Note 2 to our unaudited condensed consolidated financial statements for further explanation.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that had or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, or capital resources as of September 30, 2019.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not applicable as we are a Smaller Reporting Company.

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is (i) processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during the three months ended September 30, 2019 that have materially affected or are reasonably likely to affect our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that our objectives will be met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The information disclosed under "Legal Matters" in Note 10 to our unaudited condensed consolidated financial statements is incorporated herein by reference.

Item 1A. Risk Factors

We are including the following additional risk factors, which should be read in conjunction with our description of risk factors provided in Part I, Item 1A "Risk Factors" of our 2018 Annual Report on Form 10-K filed with the SEC on March 27, 2019, in the “Risk Factors” section of the Joint Proxy Statement included in our Schedule 14A filed with the SEC on October 22, 2019 and filed as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

Completion of the Merger is subject to a number of conditions, and if these conditions are not satisfied or waived, the Merger will not be completed, which could result in the requirement that we or NNN REIT pay certain termination fees or, in certain circumstances, that NNN REIT or we pay expenses to the other party.

The Merger Agreement is subject to many conditions which must be satisfied or waived in order to complete the Merger. The mutual conditions of the parties include, among others: (i) the approval of the Merger by the holders of a majority of the outstanding common shares of our company; (ii) the approval of the amendment to our Declaration of Trust; (iii) the approval of the Merger by the NNN REIT stockholders; and (iv) the absence of any law, order or other legal restraint or prohibition that would prohibit, make illegal, enjoin, or otherwise restrict, prevent, or prohibit the Merger or any of the transactions contemplated by the Merger Agreement. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including, among others: (a) the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers and other customary exceptions); (b) the other party’s compliance with its covenants and agreements contained in the Merger Agreement; and (c) the absence of any event, change, or occurrence arising during the period from the date of the Merger Agreement until the effective time of the Merger that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the other party.

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There may be unexpected delays in the consummation of the Merger.

The Merger is currently expected to close in late December 2019 or early January 2020 assuming that all of the conditions in the Merger Agreement are satisfied or waived. The Merger Agreement provides that either we or NNN REIT may terminate the Merger Agreement if the Merger has not occurred by March 31, 2020. Certain events may delay the consummation of the Merger. Some of the events that could delay the consummation of the Merger include difficulties in obtaining the approval of our shareholders and NNN REIT stockholders, or satisfying the other closing conditions to which the Merger is subject.

Failure to complete the pending Merger could negatively affect us.

It is possible that the pending Merger will not be approved which would prevent the transaction from being completed. If the pending Merger transaction is not completed, we may be subject to a number of material risks, including the following:


•	our shareholders would not have had the opportunity to achieve any liquidity event and our Board would have to review other alternatives for liquidity, which may not occur in the near future or at all; and


•	we have incurred and expect to incur substantial costs and expenses payable by us that are related to the potential Merger, such as legal and financial advisor fees.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

During the three months ended September 30, 2019, we did not sell or issue equity securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act”). There were also no shares sold to our existing shareholders under the Plan. During the three months ended September 30, 2019, 7,568 shares were issued to our independent trust managers, including 3,934 shares for which the cost was previously accrued during the second quarter of 2019.

Use of Proceeds from Registered Securities

We commenced the offering of our stock to California investors only on March 7, 2012 and terminated the Offering on July 20, 2016, except for continuing share sales through the Plan. Through September 30, 2019, we had sold 9,469,901 shares of common stock in the offering for gross proceeds of $95,018,996, including 1,270,279 shares of common stock under the Plan for gross offering proceeds of $13,022,784 (see Note 9 to our unaudited condensed consolidated financial statements for information regarding certain reimbursements paid to our Advisor).

Net proceeds available for investment after the payment of the costs described above were approximately $92,222,798. A portion of these proceeds, along with proceeds from debt financings, were used to make approximately $141,008,291 of investments in real estate, including the purchase price of our investments, acquisition fees and expenses, and costs of leveraging each real estate investment. See Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations — Dividends" for a description of the sources that have been used to fund our dividend distributions.

Issuer Redemptions of Equity Securities

We suspended the share repurchase program when our strategic alternatives process related to the potential sale or merger transaction was announced on January 14, 2019. As a result, there were no share repurchases during the three months ended September 30, 2019.

Item 3. Defaults Upon Senior Securities

No events occurred during the three months ended September 30, 2019 that would require a response to this item.

Item 6. Exhibits

The exhibits listed on the Exhibit Index are included herewith or incorporated herein by reference.

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EXHIBIT INDEX

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 (and are numbered in accordance with Item 601 of Regulation S-K).



Exhibit		Description
2.1		Agreement and Plan of Merger dated September 19, 2019, incorporated by reference to Annex A to Schedule 14A filed October 22, 2019, EDGAR File/Film Number: 000-55623/191162315.**
3.1		Amended and Restated Declaration of Trust of Rich Uncles Real Estate Investment Trust I.*
3.2		Amendment to Amended and Restated Declaration of Trust of Rich Uncles Real Estate Investment Trust I.*
3.3		Bylaws.*
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
32.1		Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
99.1		Joint Proxy Statement and Prospectus dated October 22, 2019, incorporated by reference to Schedule 14A filed October 22, 2019, EDGAR File/Film Number: 000-55623/191162315.**
101.INS		XBRL INSTANCE DOCUMENT
101.SCH		XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
101.CAL		XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF		XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB		XBRL TAXONOMY EXTENSION LABESL LINKBASE
101.PRE		XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
*		Previously filed.
**		Filed herewith.
***		In accordance with Item 601 (b) (32) of Regulation S-K, this Exhibit is not deemed "filed" for purpose of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.



	Rich Uncles Real Estate Investment Trust I

	By:	/s/ AARON S. HALFACRE
		Aaron S. Halfacre
		Chief Executive Officer (principal executive officer)

	By:	/s/ RAYMOND J. PACINI
		Raymond J. Pacini
		Chief Financial Officer (principal financial officer)

Date: November 12, 2019

Rich Uncles Real Estate Investment Trust I 10-Q